What really happens when you buy or sell an asset through the market?

4.6

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Before we actually get into the nitty gritties of the various stock market orders that you can place, it is essential for you to first know the process flow of a typical stock market transaction. This will allow you to better understand and appreciate the things that go on behind the curtain. And so, our focus throughout this chapter is going to be on understanding what really happens when you buy assets or sell assets through the market. Now, let’s get on with it.

We’ll first direct our attention towards the buyer’s side of things before taking a look at the seller’s side.

What happens when you place a buy order for an asset through the market?

When you place a buy order on your trading platform, here’s what basically happens. For the sake of understanding this process flow, let’s assume that the asset we’re dealing with here is stocks.

  1. The buy order that you place on your trading platform on the trading day (T day) is transmitted to your stockbroker.
  2. The stockbroker forwards your buy order to the relevant stock exchange. 
  3. The stock exchange matches your buy order with a sell order. 
  4. Once your buy order and a sell order are matched with each other, the trade is executed.  
  5. Then, the stock exchange forwards the details of the executed trade to a clearing corporation at the end of the trading session.  
  6. The clearing corporation then identifies just how many securities are to be delivered to you, the buyer. 
  7. Upon identifying the same, the corporation then instructs the depository to credit your demat account with the shares of the company that you bought in T+2 days. 

Now that you’re aware of the basic process flow of a stock market buy order, let’s take a look at what would happen during the following two different scenarios. 

Scenario 1: You do not specify any price for the purchase

If you don’t specify any price when placing a buy order on your trading platform, your transaction automatically gets executed at the lowest offer price available for the particular stock that you want to buy.

For better understanding of this concept, let’s take a look at this example.

  • Assume that you wish to buy 1 share of Hindustan Zinc Limited. 
  • The current trading price of the stock is Rs. 200. 
  • In your buy order, you specify the number of shares that you wish to buy, which is 1 in this case. But you do not specify any particular purchase price. 
  • You then place the buy order. 

Now, when your order is transmitted to the stock exchange, the exchange automatically matches your buy order to the sell order with the lowest offer price. So, let’s say these are the top offer prices in the market.

  • Rs. 201.10
  • Rs. 200.85
  • Rs. 200.90
  • Rs. 201.00
  • Rs. 200.75

In this case, the lowest offer price is Rs. 200.75. So, your trade gets executed almost immediately, without any delay whatsoever, at Rs. 200.75.

On T day, the amount of Rs. 200.75 gets debited from your trading account. And after T+2 days, the single share of Hindustan Zinc Limited would get credited to your demat account. 

That said, here’s something that you should know. In your trading platform, you can actually check the various offer prices for a particular stock. The offer price is typically displayed in an ascending order, with the lowest offer price at the top, followed by the second lowest offer price, and so on and so forth.

Scenario 2: You specify a price for the purchase

On the other hand, if you have specified a price when placing a buy order on your trading platform, the exchange will typically wait till a corresponding sell order with the same price or a lower price comes along. And once there’s a sell order with the same price as yours, the exchange would then execute the trade. 

However, if no corresponding sell order with the same price as yours is available, the exchange would simply hold onto your buy order till it comes along. 

Here’s an example that can help simplify things. 

  • Again, assume that you wish to buy 1 share of Hindustan Zinc Limited. 
  • The current trading price of the stock is Rs. 200. 
  • In your buy order, you specify the number of shares that you wish to buy, which is 1 in this case. 
  • You then specify the purchase price as Rs. 195 and place the buy order. 

Now, since the current trading price of the share is Rs. 200, there obviously wouldn’t be any sell orders at Rs. 195, which is the price that you wish to buy the share for. And so, the exchange would hold onto your buy order. 

Let’s assume that after an hour or so, a sell order for the price of Rs. 195 comes along. The exchange would immediately match your buy order with the corresponding sell order and execute the trade. 

On T day, the amount of Rs. 195 gets debited from your trading account. And after T+2 days, the single share of Hindustan Zinc Limited would get credited to your demat account. 

What happens when you place a sell order for an asset through the market?

Now that you’ve seen the process flow for a buy order transaction, let’s take a look at the same for a sell order. As with the previous section, we’ll again be assuming that the asset we’re dealing with here is stocks. Here’s what would happen. 

  1. The sell order that you place on your trading platform is transmitted to your stockbroker.
  2. The stockbroker forwards your sell order to the relevant stock exchange. 
  3. The stock exchange matches your sell order with a buy order. 
  4. Once your sell order and a buy order are matched with each other, the trade is executed.  
  5. Now, the stock exchange forwards the details of the executed trade to a clearing corporation at the end of the trading session.  
  6. The clearing corporation then identifies just how much money is to be paid to you, the seller. 
  7. The clearing corporation then instructs the clearing bank to credit your trading account with the amount of money for which you sold your shares for. 

As you can see here, other than the last two steps, which are different, the process flow is very similar to that of a buy order. Let’s take a look at what would happen in the following two scenarios involving a sell order. 

Scenario 1: You do not specify any price for the asset sale

If you don’t specify any price when placing a sell order on your trading platform, your transaction automatically gets executed at the highest bid price available for the particular stock that you want to sell.

Time for an example depicting to help you understand how this works. 

  • Let’s assume that you hold a share of Reliance Industries and that you wish to sell it.
  • Say the shares of the company are currently trading at Rs. 2,050. 
  • In the sell order screen of your trading platform, you specify the number of shares that you wish to sell, but don’t specify the price. 

What happens then? Take a guess. 

When your order is transmitted to the stock exchange, the exchange automatically matches your sell order to a buy order with the highest bid price. So, let’s say these are the top bids in the market.

  • Rs. 2,049.50
  • Rs. 2,049.80
  • Rs. 2,048.90
  • Rs. 2,049.00
  • Rs. 2,048.70

In this case, the highest bid price is Rs. 2,049.80. So, your trade gets executed almost immediately, without any delay whatsoever, at Rs. 2,049.80.  

Again, just like how you can view the various offer prices for a particular stock, you can also check the various bid prices for that stock in your trading platform as well. The bid prices are typically displayed in a descending order, with the highest bid price at the top, followed by the second highest bid price, and so on and so forth.  

Scenario 2: You specify a price for the asset sale

Okay so, what about when you specify the price? You must have already figured it out by now. But then, to ensure that you’ve understood the process thoroughly, we’ll go over it once with an example.  

Now, if you have specified a price when placing a sell order, the exchange would wait till a corresponding buy order with the same price pops up; just like how it would for a buy order.

And once there’s a buy order with a bid price matching your offer, the exchange executes the trade. That said, if no corresponding buy order at the same price as yours is available, the exchange would simply hold onto your sell order till that happens. 

Let’s take a look at an example. 

  • Assume that you wish to sell 1 share of Reliance Industries, whose current trading price is Rs. 2,050.
  • Along with the number of shares that you wish to sell, you also enter the price. 
  • Let’s assume this price is Rs. 2,080. 
  • Since the current trading price of the shares of Reliance Industries is Rs. 2,050, there obviously wouldn’t be any buy orders for Rs. 2,080. 
  • And so, the exchange would hold onto your buy order. After an hour or so, assume that a buy order for the price of Rs. 2,080 comes along. The exchange would immediately execute the trade. 

Wrapping up

We’ll end this chapter here, with this. When you specify the price during a buy or a sell order, one of three things is likely to happen. It can get executed immediately, it could get executed after a small delay, or it may not be executed at all. The price that you set for the order determines which outcome occurs. In the context of placing orders and choosing stocks, liquidity is also just as important as the price you set. We’ll look into liquidity in greater detail in the coming chapter.

A quick recap

  • When you place a buy order or a sell order, your stockbroker, the exchange, and the clearing corporation all work together to execute the trade.
  • If you do not specify any purchase price, a buy order is executed at the lowest offer price.
  • And if you do not specify any sale price, a sell order is executed at the highest bid price.
  • When you do specify a price for either order, the trade is executed at that price.
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